Macroprudential Policy in Germany and the EU

Macroprudential Policy in Germany and the EU Políticas macroprudenciales en Alemania y la UE Robert Düll

The views expressed are my own and do not necessarily represent those of the Deutsche Bundesbank

Agenda

1) Policy Framework in Europe

2) Macroprudential Policy in Germany

3) Macroprudential Instruments

4) Research and Analytical Instruments

5) Conclusion

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Robert Düll, Deutsche Bundesbank

Macroprudential Policy in Germany and the EU




4) Research and analytical instruments

5) Conclusion

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Policy Framework in Europe – European System of Financial Supervision

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ESFS

Microprudential supervision Macroprudential supervision

The Joint Committee

National supervisory

authorities

EBA EIOPA ESMA

ESRB

Policy Framework in Europe – European Systemic Risk Board (ESRB)

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ESRB

General Board (GB)

Steering Committee (SC)

Advisory Scientific

Committee (ASC)

Advisory Technical

Committee (ATC)

Se

cre

taria

t

• Part of ESFS

• Issues warnings & recommendations

• Addressees: EU, Member States, supervisors

• Comply or explain principle

Policy Framework in Europe – Objectives of the ESRB

• Develop a European macro-prudential perspective;

• Enhance the effectiveness of early warning mechanisms;

• Improving the interaction between micro-and macro-

prudential analysis;

• Allow for risk assessments to be translated into action by

the relevant authorities.

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Policy Framework in Europe – Objectives of the ESRB (2)

ESRB can be seen as a “lesson learned” from the financial

crisis:

• Consistency between macro- and micro-prudential supervision.

• EU pioneering role

• Basis for better early detection of systemic risks

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Policy Framework in Europe – Banking Union

• Basic justification for need for macroprudential policy does not

change

• New EU framework for macroprudential policy must not be

endangered

o ESRB und national macroprudential autorities

• Anticyclical capital buffer

o Must be set on a national level

o Should be set by national authorities

• Adaptions on an institutional level might become necessary

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5) Conclusion

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Macroprudential Policy in Germany – Institutional Set-up

Deutsche Bundesbank

• Monetary Policy

• Financial Stability, including macroprudential surveillance

• Co-sharing of banking supervision (legal supervisor: BaFin)

o continuous oversight of credit institutions

Federal Financial Supervisory Authority (BaFin)

• Supervises banks and financial services providers, insurance sector and

securities trading

• Subject to the legal and technical oversight of the Ministry of Finance

• Funded by fees and contributions from the institutions it supervises

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Macroprudential Policy in Germany – Financial Stability Act

• ESRB recommendation: National macroprudential authorities

(Januar 2012)

o Operationally independent

o Control over appropriate instruments

o Leading role for central banks

Germany: Financial Stability Act (Finanzstabilitätsgesetz)

o Legal basis, adoption expected this fall

o Intended implementation date: 1 January 2013

o Establishment of Financial Stability Commission

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Macroprudential Policy in Germany – Financial Stability Commission

Financial Stability Commission

• Established by draft law (Financial Stability Act)

• Macro-prudential authority

• Operationally independent

• 3 voting representatives each from Bundesbank, Ministry of

Finance and BaFin

o Representative of the Financial Market Stabilisation Agency

(FMSA) in a non-voting capacity

• Quarterly meetings on a regular basis

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Macroprudential Policy in Germany – Financial Stability Commission (2)

• Decision making:

o Resolutions require simple majority

o No major decision will be taken against Bundesbank’s

position

• Instruments of the financial stability committee:

o Warnings and

o Recommendations („comply or explain“)

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Macroprudential Policy in Germany – Financial Stability Commission: Tasks

• Warnings and recommendations:

o Recipients are German public bodies

o Recipients are bound by “comply or explain”

o FSC follows up on implementation

• Advice on dealing with warnings and recommendations of the

ESRB

• Annual report to the Bundestag

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Macroprudential Policy in Germany – Division of Tasks

Tasks of the Bundesbank

• Macroprudential surveillance

• Proposes and drafts warnings and recommendations

• Drafts report to the Bundestag

Tasks of BaFin

• Brings supervisory expertise and information to the Committee

• Control over legally binding instruments

Provision of Information

• Enhanced exchange between Bundesbank and BaFin

• Bundesbank may obtain additional information from market

participants

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Macroprudential Policy in Germany – The Mandate of the Bundesbank

Challenges:

• Increase analytical capacity

• Need for further development of

omethodologies

oexisting data sources and closing data gaps

• Further intensification of cooperation with BaFin and MoF

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5) Conclusion

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Macroprudential Instruments – Toolbox

• Three types of macroprudential instruments:

o „Soft“ instruments: Communication (e.g. FSR)

o „Medium“ instruments: Warnings and recommendations

o „Hard“ (policy) instruments: instruments of intervetion (e.g.

CCB)

• Instruments should cover the whole financial system: banks,

insurance companies, markets

• Most important individual field of action: Banking regulation in

EU

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Macroprudential Instruments – Communication: Financial Stability Report

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FSR aims at

• Informing stakeholders and general public,

• Highlighting possible risk scenarios

• Warning of concrete risks

• Published in November

Main areas of 2011 report

• Sovereign debt a central risk factor

• International financial system between risk aversion and yield-seeking

• German financial system between heightened resilience

and growing contagion risk

• Regulatory framework to contain systemic risk

Macroprudential Instruments – Communication (2)

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BBk disseminates policy messages, analyses and research via

• Speeches

• Newspaper articles and interviews

• Bundesbank Discussion Papers Seriers

• Journal publications

• Conference presentations

• Organization of conferences (e.g. 2012 fall conference: The banking

sector and the state)

Macroprudential Instruments – Policy Instruments: European Banking Regulation

• Basel III is implemented in the EU through a directive and a

regulation (CRD IV/CRR)

• Instruments and measures provided for in the CRD IV/CRR:

o Stricter prudential requirements for a limited period of time at

the national level, inter alia :

o Capital requirements, risk weights, disclosure requirements,

liquidity requirements

o Counter-cyclical capital buffer

o Systemic risk buffer

o Risk weights for real estate exposures (private and

commercial)

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Macroprudential Instruments – Policy Instruments: Example of a Counter-Cyclical Tool

Counter-cyclical capital buffer (CCB) [operational as of 01.01.2016]

Part of the Basel III agreement; EU implementation through CRD IV

Reciprocity: e.g. ESP imposes CCB of 2%

=> Banks in GER have to apply it to their Spanish exposure

CCBBank= exposure weighted average of national CCBs

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CCB (in % of RWA) 0% - 2.5% > 2.5%

mainly based on credit-to-GDP

gap

[credit/GDP*100-trend]; ESRB

approved

Mandatory

reciprocity

Voluntary

reciprocity

reviewed quarterly

based on different indicators;

reflecting structural risk

no

reciprocity

allowed

reviewed annualy;

lawfulness

checked by ESRB

and EBA

Historic simulation of a possible CCB in Germany:

Macroprudential Instruments – Policy Instruments: Example of a Counter-Cyclical Tool (2)

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Source. Deutsche Bundesbank,

Financial Stability Review 2010.

Macroprudential Instruments – Policy Instruments: Structural and Crisis Management

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Financial Market

Stabilisation Agency (FMSA)

Financial Market Stabilisation Fund

(Soffin)

Restructuring Fund

• reactivated (€480 billion)

• toolkit:

o guarantees

o recapitalisation

o resolution agencies

o (bad banks)

• financed by bank levy

• target volume: €70 billion;

(in run-up borrowing is possible)






5) Conclusion

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Research and Analytical Instruments– Research in Macroprudential Issues

Progress in research on macroprudential issues, e.g.

Bundesbank Working Papers/Discussion Papers:

• Düllmann und Puzanova (2011), Systemic risk contributions: A credit

portfolio approach

• Memmel, Sachs und Stein (2011), Contagion at the Interbank Market

with stochastic LGD

• Podlich und Wedow (2011), Credit Contagion between Financial

Systems

• Brumm/Kubler/Grill/Schmedders (forthcoming): Optimal Regulation

of Margin Requirements.

• Hilberg und Meller (forthcoming): All we need is market discipline?

What macroprudential regulators can learn from bond markets.

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Research and Analytical Instruments– Research in Macroprudential Issues (2)

Further current fields of research:

• Measurement of systemic risk and development of a financial

stability indicator

• Early warning systems for systemic crises

• Measurement of interconnectedness in the financial system and

estimation of resulting contagion risks

• Transmission channels of instruments proposed in basel III also

on the real economy

• Optimal degree of transparency, e.g. concerning stress tests

• Quantification of refinancing advantages of SIFIs

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Research and Analytical Instruments– Systemic Risk Analysis: Instruments

• Financial stability indicators

• Stress testing

• Contagion models

• Analysis on systemic importance

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Research and Analytical Instruments– Systemic Risk Analysis: Financial Stability Indicators

Selection of Indicators needs to take into account:

• Structure of the financial system i.e. key players and their

interdependencies

• Relevant risk factors for the set of players paying due regard to

business models

• Timely reflection and identification of emerging risks

Risk categories:

Credit -, market - and interest rate, liquidity risk, interlinkages and

imbalances, risk bearing capacity for German and other systemically

important international institutions, macroeconomic environment in

Germany, Europe, other global players

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Research and Analytical Instruments– Systemic Risk Analysis: Stress Tests

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To

p-d

ow

n

Bo

tto

m-u

p

Credit Risk Market Risk Liquidity Risk

Sensitivity Capital Stress Tests

Macroprudential

Stress Tests: - Income Stress Test

-Three Stage Model

- Portfolio Model

Stress Tests

based on the new

Basel Liquidity

Standards

Liquidity

Monitoring

Tool

EU-wide Stress Testing Exercise (EBA)

- Interest Rate Risk

- Credit Spread Risk

- Equity Risk

- Exchange Rate Risk

- Volatility Risk

Research and Analytical Instruments– Systemic Risk Analysis: Stress Tests

Sensitivity Stress Tests

• Capital Stress Tests

Macroprudential Stress Tests

• Income Stress Tests

• Multi Stage Models

• Macroeconomic Portfolio Stress Tests

Market Risk Stress Tests

Liquidity Risk Stress Tests

• Top-down and Bottom-up Approach

• Liquidity Monitoring

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Research and Analytical Instruments– Systemic Risk Analysis: Contagion

• Network approaches: institutional data; financial institution‘s

resilience to the domino effects

o Data constrains

• Interdependence models: market data; cross-sectional

financial linkage using statistical correlations

o Co-Movements: monitoring systemic risk emanating from

international financial systems

o Co-Crash Probabilities: measuring correlation of default

risk of financial institutions

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Research and Analytical Instruments– Systemic Risk Analysis: Systemic Importance

• "Too systemic to fail" institutions

o How to deal with such institutions?

o Identify the degree of systemic importance

o Compute individual institution's share of overall systemic risk

• Conditional risk models:

o Marginal impact: A bank's contribution to overall systemic risk

o Conditional VaR

o Credit Portfolio Approach

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5) Conclusion

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Conclusion

• European macroprudential structure is in place

• Macroprudential supervision in Germany will be

considerably strengthened and has a clear statutory

mandate

• Bundesbank to be assigned a key role:

o Risk identification

o Preparation of actions

• Bundesbank stands ready to assume its new tasks

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Conclusion (2)

• Germany is compliant with the ESRB Recommendation

• Warnings and recommendations as communication tools

should not be underestimated

• Development of analytical toolbox has advanced

• Further development of preventive instruments necessary

• Data gaps are being filled

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Thank you very much for your attention! ¡Muchas gracias por su atención!

Robert Düll

Tel.: +49 69 9566 4552

[email protected]

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Macroprudential Policy in Germany and the EU

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